NERC and the Challenges Ahead

Nigerian Electricity Regulatory Commission (NERC) right now faces three serious hurdles as it goes about to transform and reposition electricity regulation in Nigeria. These hurdles are political, organizational and operational, and technical. Making them more daunting is the current dearth of the essential human and financial resources needed in solving them. The most overwhelming problem for a would-be world-class commission-as it is the case everywhere in the government-is that it too is buried in the same civil service bureaucratic system, where people go to lazy around. NERC too carries civil service culture to its own upper levels. With efficiency and effectiveness unknown in a civil service government, NERC leadership undeniably knows it is going to be tough to achieve the average.

Yes, NEERC leadership is fully aware that its success is dependent on its ability to attract and keep talented senior employees, who believe in the mission, who fit with the culture, who are ready to keep learning, and who-above all-want to deliver world-class results with less guidance. But, can the present civil service rules permit the commission to undertake the needed personnel auditing, let alone clear the ‘deadwoods’ on its payroll, without inviting severe political rant and rave from politicians who mostly are their godfathers? Otherwise, how can NERC be able to assemble the best and the brightest, not only with the kind of expertise required in dealing with its multifaceted tasks, but also men and women with the right mix of professions, the right aptitude, ethics, achievements, and personal career interests?

I hope the leadership of NERC should not give up, if enhancing the country’s electricity supply is the really agenda. To begin with, the chairman of the commission should personally lead the search for the best and the brightest in filling the little window available to NERC. He should not stop there. Making sure these best minds are retained, will demonstrate his readiness in developing their full potential. But increasing employee versatility and skills into technical, social, and managerial high performance, NERC should also have in place on-the-job training, courses, sabbaticals, and job rotation programs. This is besides making sure an in-house library is there for its people. Of course, all this will come to naught without correspondingly world-class compensation and benefits. That is the real headache because with government’s dwindling revenue, it seems that should be a-no-go area for NERC.

But of course there are some non-financial ways to motivate staff. One of those ways to inspire and bring out the best in staff is making the human resource department celebrate people who best exemplify NERC, by setting up “Wall of Fame.” Another way to enhance their operational and managerial competency is to fully humanize NERC by making it a friendly and democratic community, where unnecessary communication decays and socialization barriers are minimized. This means that organizational design should be kept as simple as possible, with few levels of hierarchy left in place so that lots of authority should reside at lower and middle levels, where the real work is done. With minimum bureaucracy, initiative rises as people contact one another without going through bureaucratic hierarchies, and of course, with common objectives rather than confining rules guide actions. This novel departure from our present civil service bureaucratic fiefdoms should be reinforced with the development of organization-wide value system.

Also, building a peak-performance team with positive-participatory-spirit that motivates people NERC should make sure that on regular basis members of staff are brought together to freely talk, discuss, argue, brainstorm, plan, and above all, share information, ideas, and experiences. In addition, managers should be encouraged to take a long-term and broad-based view in their operations as well as expansive view based on constituencies and substantive objectives.

For someone who hates micro-management, it is my view that management distances itself from micro-managing because if not for anything else, it tends to diminish people’s self-confidence, saps their initiative mindsets, and stifles their ability to grow on the job, which come with thinking for oneself. But the more reason to avoid micro-managing is because rarely management knows as much as the people it wants to harass. So, rather than micromanage, NERC commissioners should endeavor to put in place a world-class culture and processes that encourage people to get things done, and done more quickly and more professionally. If well done, then, NERC management should assign itself the task of committed follow-ups, follow-ups based on long-run operational philosophy.

Okay, let’s assume that NERC can get these problems behind it over time, but how can it get out of the current messy corruption baggage all government establishments today carry in Nigeria-including the corruption that forced the dissolution of the former commissioners? While no one is expecting the possibility of eradicating this ravaging cancer, believing corruption can be minimized can be possible if everyone wants it done. But avoiding industry capture and “revolving door” (which occurs when regulators get too close to the regulated and begin promoting investors’ interests at the expense of broader societal interests) should be a continuous process.

One such action should be to limit the amount of coziness with the regulated companies, including prohibiting NERC’s management from communicating with industry leaders outside of the narrowly set official channels. Another way to curtail corruption should be to require senior management to publicly declare their assets. Also to be explored is the signing of an undertaking by senior staff not to accept gifts of any kind, and should gifts be accepted, such gifts should automatically belong to NERC, not to the staff receiving them. Travels should be limited and on staff’s accounts, unless approved by management and unless such travels are important to the set goals and objectives of NERC.

The real challenge for NERC is how much political independence it can enjoy. Enjoying absolute political independence-particularly from both the Presidency and the National Assembly-is critical to the overall success of the commission, if it can regulate without fear or favor. In fact, without firm independence, it is obvious that politicians would invade NERC making innumerable demands, including interests as narrow as allowing producers to charge end-users higher tariffs with the goal to share the excess rents either through outright bribes or through political donations. Without full independence, those with the political weights can negotiate favorable license (and/or renewal of existing license) for companies they are in their payroll at other stakeholders’ expense. That is why NERC’s independence should go beyond four-year tenure for the commissioners, to include appointing commissioners based on qualifications rather than on the present use of political affiliation.

Independence is also needed given NERC’s responsibility to protect both consumers and producers from the opportunistic behavior of competing parties, including making sure rates are kept substantially below their monopoly levels, but not so low to become confiscatory. This is going to be daunting, especially when bringing the full benefits of reliability and affordability cannot happen without large investments that attract higher returns (ROI). Should high rate-of-return regulation be the attraction, what measures should NERC have in place to ensure that these companies do not bloat the very value of their capital stocks? Besides, should such huge investments come in the form of consortium-financing, shouldn’t consortium-companies engage in price fixing to assure themselves higher return on equity (ROE)? Getting everyone happy well remains NERC’s catch-22.

It is here

that NERC’s pricing policy is being tested, whether to continue with its price-cap regulation, based on MYTO-or switching over to cost-of-service regulation. Of course the present use of price-cap regulation is more suitable to Nigeria’s case. New to regulatory traditions-and with less human and financial resources at its disposal, price-cap has been technically less cumbersome for NERC. Besides, MYTO pricing requires little or no political interventions since price reviews only occur at clear intervals. The problem MYTO faces is the very high political and economic costs of predicting tariffs inaccurately, especially when stakeholders have to wait a given number of years before it can be reviewed. Whether to continue with MYTO or change to cost-of-service may not wholly solve the problem of making broader social interests prevail in IPP-led electricity infrastructure.

But it is this social pricing dilemma that will challenge Dr. Amadi’s creative leadership. Should he and his team pursue social pricing that discounts electricity bills below market price in an effort to appease poor consumers, what about the fierce opposition will be coming from investors? Or should the policy overtly favor investors, what about the consumers’ rage in reaction? It could be possible for NERC to kill two birds with one stone-that is, being on the side of investors without compromising consumers’ concerns by providing them energy efficiency and conservation education support. Even with this, NERC’s headaches are not going away.

That also brings us to the question of whether NERC should follow rule-making at the expense of case-by-case (or vice-versa) in regulating all the companies. Rule-making regulation, no doubt encourages advanced planning, administrative efficiency, and unflawed consistency, besides its evenhandedness (i.e. without favor or discrimination). It is still riddled with some technical and political problems, particularly when it comes to policy precision. So, should NERC adopt rule-making, it should also accept legislative oversights that come with it.

But there is a trouble-maker, an insatiable stakeholder, presently quiet, but soon will be roaring in an incontrollable anger. Here, we are talking about the environmental foot-soldiers. One of the benefits foreign players in the electricity business want to enjoy in developing economies like ours is an environmental-friendly NERC. Otherwise, how can these investors make Nigeria their dumping ground for obsolete and pollution-intensive electricity facilities? One of the issues always raised by foreign investors as they invoke ‘force majeure’ (passing risks associated with uncertain, unpredictable, and uncontrollable economic and environmental events to the host country) is that host countries provide them insurance to hedge all their risks, particularly environmental risks. With force majeure, protecting Nigerian consumers from unscrupulous foreign investors will be difficult since it is this that enables them exist or cash-out at will, while leaving behind-at no cost-the devastating environmental and social costs.

So, issues of regulation that protects the environment in a way to discourage undue free-ride by investors have to be well sorted out otherwise Nigeria becomes pollution sanctuary for foreign investors. Pursuance of enforcement actions that combine market and command-and-control environmental regulatory systems all at the same time needs to be explored by NERC. But no matter what, when it comes to life-threatening environmental situations, cases like electricity plants associated with emissions that cause the impairment of the reproductive, neurological, and respiratory systems, nothing should be ignored in protecting the Nigerian people. But the good news remains, in as much as private power plants pollute, they are almost always more environmental-friendly than public companies.

My worries in the final analysis are, but where are the electricity companies to regulate? Where will the much needed $12 billion annual investments come from? With the government out of the picture, then, who are those investors ready to carry the huge financial burdens while at the same time caring to listen to NERC and its rules? With the recent western financial meltdown coupled with the bankrupting of most western financiers, who else, other than the Chinese can come up with such kind of money?

But notwithstanding China’s huge foreign reserves, they still have different priorities than Nigeria’s power sector. So, isn’t it plausible to explore our only window, which is to create a financial vessel that acts as financial consortium-builder? The creation of what I call the “Nigerian Electricity Finance Authority” (NEFA) can be that lead financier, which can easily attract independent power producers into joint venture financing. Using NEFA to achieve financially tasking and risky electricity projects is our right answer now.